Bankruptcy Litigation Committee

ABI Committee News

Cases Address the Standard for Confirmation Appeals in the Second Circuit

During one week in May, two appellate decisions came out of the district court of the Southern District of New York relating to mootness of appeals of confirmation orders. While the results of the two cases were opposite, the rationale was consistent.

The first case was In re Karta Corp., 342 B.R. 45 (S.D.N.Y. 2006). In this case, the debtors operated various industrial facilities. The businesses had originally been a family venture, but there had been a falling out, and serious insider disputes both preceded and enveloped the bankruptcy case. A plan was eventually confirmed, and the father, “Pat,” was the “insider” who was unhappy with the plan. Immediately after confirmation, the debtors sold substantial assets and turned over management of a large part of their businesses to third parties. The same day, Pat appealed the confirmation order. The confirmation order included releases of nondebtor parties. Debtors moved to dismiss the appeal on the grounds it was moot.

Judge Adlai S. Hardin denied the motion to dismiss after analyzing the case on the basis of an equitable mootness standard. “Equitable mootness is a prudential doctrine that is invoked to avoid disturbing a reorganization plan once implemented.” Karta, 342 B.R. at 52, citing In re Metromedia Fiber Network, Inc. 416 F.3d 136, 144 (2d Cir. 2005). “An appeal should . . . be dismissed as moot when, even though effective relief could conceivably be fashioned, implementation of that relief would be inequitable.” Id. at 52, quoting In re Chateaugay Corp. 988 F.2d 322, 325 (2d Cir. 1993).

Judge Hardin focused on the speed at which the matter had been pursued by the appellant. Debtors argued that since Pat had failed to obtain a stay preventing the sale of assets and transfer of management, he had lost his right to appeal the confirmation order. Judge Hardin disagreed, noting that Pat had sought an expedited appeal, and also noting that the Second Circuit has stated that seeking a stay is not a necessary precondition to avoiding dismissal on the ground of equitable mootness. Id. at 53, citing Metromedia Fiber Network, Inc. 416 F.3d at 144-145.

A few days later, in In re Loral Space & Communications Ltd., 342 B.R. 132 (S.D.N.Y. 2006), Judge Robert Drain dismissed an appeal of an order confirming plan, on the grounds that the plan had been substantially consummated. In Loral, the plan was confirmed in the fall of 2005, and the motion to dismiss the appeal was not filed until February 2006. There was no dispute among the parties that the plan had been substantially consummated. Id. at 137.

The court discussed the legal standard as follows. First, an appeal of a plan that has been substantially consummated is presumed to be moot. “Reviewing courts presume it will be inequitable or impractical to grant relief after substantial consummation of a plan of reorganization. Id. at 137, citations omitted. As in Karta, the court discussed principles of equitable mootness and the cases giving rise to that theory. Ibid.

However, the presumption of mootness that arises upon substantial consummation can be rebutted by establishing all of the following five factors (the “Chateaugay factors”) set out by the Second Circuit in In re Chateaugay Corp. 10 F.3d 944, 952 (2d Cir. 1993):

  1. The court can still order some effective relief;
  2. Such relief will not affect the re-emergence of the debtor as a revitalized corporate entity;
  3. Such relief will not unravel intricate transactions so as to knock the props out from under the authorization for every transaction that has taken place and create an unmanageable, uncontrollable situation for the bankruptcy court;
  4. The parties who would be adversely affected by the modification have notice of the appeal and an opportunity to participate in the proceedings; and
  5. The appellant pursued with diligence all available remedies to obtain a stay of execution of the objectionable order . . . if the failure to do so creates a situation rendering it inequitable to reverse the orders appealed from.” Loral at 138.

In Loral, Judge Drain concluded that too much water had passed under the bridge and that the appellant failed to establish all of the Chateaugay factors. The court focused on the fact that the primary issue raised in the appellant’s brief was that appellants had not been allowed sufficient opportunity to inspect and value the property that was central to the plan. Since virtually all of that property had been disposed of as part of the stipulated substantial consummation process, the court found it impossible to separate the granting of effective relief from substantial consummation. Also, the court noted that retrieving that same property for the purposes of allowing appellants to inspect and value would negatively impact the debtor’s fresh start and create vastly complex situation for the bankruptcy court to address. The other factors were summarily addressed, and the court concluded by granting the motion to dismiss the appeal and upholding confirmation of the plan.

Appealing confirmation of a plan without obtaining a stay pending appeal is possible, as demonstrated by Karta, but the better practice for any party serious about challenging a confirmation order is to promptly seek a stay.